The EUR/USD rallied during a large portion of the day on Thursday after the ECB raised interest rates by 50 basis points. Furthermore, Christine Lagarde reiterated the idea that the ECB was going to stay very hawkish, so that of course had people buying the Euro based upon potential interest rate moves.
However, the ECB is tightening into a recession, so growth will become a major problem. Beyond that, the Euro may be a little overextended so it’s not you surprised to see a bit of a pullback here. Couple that with the fact that Jerome Powell was adamant about staying the course on restrictive monetary policy, that we may have the beginning of something to turn around the market. I do believe that the Euro is overextended, and has no business being up here from a fundamental standpoint, but I also recognize that the 1.08 level above is the gateway for a massive trend change. In the short term, it would not surprise me at all to see the Euro try to go back down to the 1.05 level, and then maybe even the 200-Day EMA.
Heading to the Holiday Session
- Keep in mind that we are heading to the holiday season, and therefore it’s likely that we will have a serious lack of liquidity. The lack of liquidity could bring big moves into the market suddenly based on headlines, or it could just make the markets very quiet.
- Friday is the options expiration on Wall Street, so there will be a lot of money moving at the very end of the week. It’s worth noting that the euro not only could not hang on to gains but gave them up.
- This is something that I have noted over the last several ECB meetings when they tighten monetary policy, the Euro ends up losing ground by the end of the day. Whether or not that continues to be the case going forward is still open for debate, but we certainly look as if a pullback makes the most sense in the short term.
I would expect a lot of noisy and erratic trading behavior, but that’s nothing new considering how many different outlooks we have on global growth right now, especially in the European Union which has major issues when it comes to energy.
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